With a new year on the horizon, Britain’s economic recovery remains at a standstill. While the government’s fiscal reports may highlight a few successes, they do not paint a complete picture of the current state of the economy in the UK. Many business owners are still facing the same challenges that have plagued them throughout the global economic downturn. Chief among these challenges is the threat of insolvency, with business owners finding themselves unable to meet their financial obligations and struggling with financial liabilities that far outweigh their company’s assets. Moving into 2015, small business owners across the UK will have to learn to manage their risk for insolvency, and take steps to ensure their business survives another year.
Insolvencies in the UK
The pace of economic growth in the UK, and across the Eurozone, has been disappointing to say the least. Since 2007, more than 700,000 businesses have failed in the UK alone. That’s an average of 100,000 insolvencies each year, and 2015 offers little relief. According to Atradius, insolvency rates are set to remain high throughout the new year. Britain’s business owners will have to find ways to reduce their risk of insolvency, and that means taking some proactive steps.
Insolvency Risk and Cash Flow
Many small businesses may appear to be going concerns on the surface, but when it comes to their cash flow they may actually be teetering on the edge of failure. Business owners who find themselves in this tenuous position must take steps to increase their cash flow if they are going to avoid insolvency and a court ruling of bankruptcy. The most effective measure a business owner can take include the following.
• Debt Recovery – Allowing invoices to go unpaid is a major mistake. When it comes to keeping a business solvent, owners and directors need to invoice clients promptly and follow up immediately on any unpaid bills.
• Factors – Business owners experiencing cash flow troubles, may sell their unpaid invoices to a third party called Factors. These Factors pay the business owners a percentage of their outstanding debt, and then act as debt collectors on the balance. In a crunch, this is a good way for troubled businesses to recover some of their outstanding debts.
• Reducing Stock – When cash flow problems get serious, business owners may reduce the money they have tied up in overstock.
• Selling Assets – When a business is facing serious cash flow problems, they may sell off expendable assets in order to bring cash into the business.
Negotiating With Creditors
If a business’ cash flow problems worsen, and they are faced with financial liabilities that they cannot meet, they must turn to their creditors to negotiate a new deal. However, business owners often find it daunting to approach their creditors, hoping to manage their financial recovery alone. This can be a fatal mistake, leaving business owners in a weakened position when they finally do have to negotiate with their creditors. Proactive business owners, who can work with their creditors and can keep the lines of communication open, will be more likely to avoid insolvency and see out the coming year.
Reducing Overhead to Avoid Insolvency
In extreme circumstances, businesses may find it necessary to reduce their operational overhead in order to increase cash flow and avoid insolvency. Typically, businesses will start by eliminating areas that are most expendable, such as advertising and research and development. If these steps prove ineffective, business owners will then be forced to make changes regarding their staff. This can be anything from cutting hours and eliminating overtime, to making some employees redundant. These are hard decisions for any business owner to take, but difficult times require difficult decisions.
Help for at Risk Businesses
Business owners who find themselves at risk, have a number of resources to help them avoid insolvency. Beyond accountants and solicitors, business owners (and managing directors) can turn to the Insolvency Service for help and advice. This government service can help businesses in trouble by putting them in contact with an insolvency practitioner who will help them manage the process of receivership and liquidation. Unfortunately, with Britain locked in a sluggish economy, the Insolvency Service is likely to have plenty of work in the coming year.
The economic outlook for 2015 isn’t as promising as it could be, and unfortunately many business owners will struggle to make it through the year. Insolvency has been a very real threat for thousands of, businesses throughout the UK and Europe. Unfortunately, it is a threat that will continue to dog British business owners for some time to come.